Thank You

Error.

It happens almost every week. A salesman from a brokerage gets halfway through his PowerPoint presentation highlighting his firm's stock picks, when Preston Athey speaks up: "Don't tell me about the stocks you like. You've already told your hedge-fund clients. Tell me about the stocks your clients hate." As always, Athey cuts to the heart of the matter, trying to discover an opportunity among unpopular stocks—even if it makes the guest speaker uncomfortable for a bit. "The smart ones catch on soon enough," says the 34-year veteran of T. Rowe Price.

Relentless bargain-hunting paid off for Athey and Small Cap Value even before high-speed trading and ETFs came into vogue. Since he joined the fund in 1991, it's produced an average annual return of 12.02%. As of May 31, the fund's 15-year average return of 10.45% beat those of more than 86% of small-cap value funds tracked by Morningstar. Its turnover rate has averaged below 10% per year for the last decade, about half the 20% rate found even in today's index funds. That's helped keep Small Cap Value's expense ratio down to 0.82%.

Athey on volatile markets: "It's never as good as you think it is when it's great, and never as bad as you think it is when it's bad."
Max Hirshfeld for Barron's

Athey relies on fundamental analysis, carefully weighing the balance sheets and businesses of companies that have fallen out of favor. At the height of the Internet bubble, he was buying unglamorous companies like Cleveland Cliffs, now
Cliffs ResourcesCLF -4.940711462450593%Cliffs Natural Resources Inc.U.S.: NYSEUSD4.81
-0.25-4.940711462450593%
/Date(1427835919724-0500)/
Volume (Delayed 15m)
:
9234542AFTER HOURSUSD4.8
-0.00999999999999979-0.2079002079002079%
Volume (Delayed 15m)
:
52033
P/E Ratio
N/AMarket Cap
775596785.05249
Dividend Yield
12.474012474012474% Rev. per Employee
829298More quote details and news »CLFinYour ValueYour ChangeShort position
(CLF), a supplier to domestic U.S. steel makers. He liked its strong finances and its market-leading position in iron ore. He accumulated shares monthly for three years at an average cost of $3 a share. From 2003 through 2008, he sold his stake at an average of $25 a share.

For him, excess—as in the case of hedge-fund favorites—can provide opportunity. "Whatever the extreme, you have to play against it," he says. "It's never as good as you think it is when it's great, and never as bad as you think it is when it's bad."

Athey deploys a number of classic value-investing techniques but doesn't let any one value discipline dominate. Some of his picks are deep value, some are relative value, some are even growth at a very reasonable price. By charter, 80% of the portfolio must conform to the Russell 2000, which includes stocks with market caps of $125 million to $2.9 billion. But this doesn't stop him from holding good performers well after they have become mid-caps.

"More than ever, we rely on our analysts and managers doing fundamental analysis on all companies in which we invest, including routinely interviewing the managements—the way we have been doing it since [Thomas Rowe] Price's day 75 years ago."

ATHEY, WHOSE FATHER WAS a money manager, followed the typical T. Rowe Price management progression—moving from the analyst ranks to portfolio chief. He came to T. Rowe from Stanford Business School, having graduated in economics from Yale, where he was a member of the Whiffenpoofs, the men's chorus. He also spent five years in the Navy as a speechwriter for Adm. Hyman G. Rickover, the father of the modern nuclear service.

His original boss, Ed Mathias, now a senior partner with the Carlyle Group, the Washington-based private-equity powerhouse, says he watched his young staffer make two important transitions, from tech-stock analyst to junior portfolio manager of a growth discipline, and then from growth to value manager in the fairly new small-cap fund. "He has a curious mind, and a real passion for research. You'd be hard pressed to find anyone who thinks ill of him. That's not easy in this business," says Mathias.

T. Rowe Price

Small-Cap Value Fund

Total Returns*

1-Yr

3-Yr

5-Yr

PRSVX

-3.79%

16.94%

1.26%

Lipper Small-Cap Index

-7.79

16.61

0.18

Morningstar Small Cap

-7.59

19.03

0.75

% Of

Top 10 Holdings

Ticker

Portfolio**

Raven Industries

RAVN

2.0%

ProAssurance

PRA

2.0

Landstar System

LSTR

1.9

3D Systems

DDD

1.7

Aaron's

AAN

1.7

East West Bancorp

EWBC

1.5

Genesee & Wyoming

GWR

1.4

Kilroy Realty

KRC

1.1

Carpenter Technology

CRS

1.1

Markel

MKL

1.1

Total:

15.5

*All returns are as of 5/31; three- and five-year returns are annualized. ** As of 5/31. Sources: T. Rowe Price; Morningstar; Lipper

As much as he seeks opportunity in extremes, Athey also pays heed to risks. Back in 2008, the obvious contrarian play would have been housing-related stocks. He nibbled around the edge of builders, declaring: "I was willing to get nicked by the knife. But I refused to be stabbed."

Despite headline-grabbing fears of a global slowdown, T. Rowe Price's small-cap specialist is optimistic about the prospects for the U.S. economy and equities because energy prices have come down and manufacturing is enjoying a renaissance. By almost any measure equities represent a strong value relative to the low-yielding fixed-income market, he says.

Right now, the portfolio manager favors oil-tanker stocks, such as
Overseas Shipholding Group
(OSG) and
Teekay TankersTNK 0.34965034965034963%Teekay Tankers Ltd.U.S.: NYSEUSD5.74
0.020.34965034965034963%
/Date(1427835767331-0500)/
Volume (Delayed 15m)
:
667404AFTER HOURSUSD5.737
-0.00300000000000011-0.05226480836236934%
Volume (Delayed 15m)
:
720
P/E Ratio
9.40983606557377Market Cap
617050711.680679
Dividend Yield
2.0905923344947737% Rev. per Employee
226475More quote details and news »TNKinYour ValueYour ChangeShort position
(TNK), which trade for 25% and 50% of their respective book values. "The market is telling you that it doesn't trust the stated book values of these two companies and that they likely won't survive. We're taking the opposite position. And while it's true that many shipping companies won't be around in the next few years, some are going to survive and prosper—the ones with little debt and enough cash on their balance sheets. Often, these near-death experiences lay the groundwork for investors to make a good deal of money." Teekay, for instance, has about $25 million in cash and $720 million in debt—and $575 million of shareholders' equity. The debt doesn't mature until after 2016, giving it ample time to work out a solution.

Athey tends to stick with stocks he likes. He first bought
MarkelMKL -0.3331043510945783%Markel Corp.U.S.: NYSEUSD768.96
-2.57-0.3331043510945783%
/Date(1427835688412-0500)/
Volume (Delayed 15m)
:
82428AFTER HOURSUSD768.96
%
Volume (Delayed 15m)
:
14626
P/E Ratio
34.35924932975871Market Cap
10726581903.1335
Dividend Yield
N/ARev. per Employee
596681More quote details and news »MKLinYour ValueYour ChangeShort position
(MKL), a Richmond, Va., insurer, nearly 20 years ago, and it remains among the fund's biggest holdings. His initial purchase price was $30; it's at more than $430 a share. Tom Gayner, president and chief investment officer for Markel, says Athey has made an excellent shareholder, couching his criticism in lots of positive suggestions. Says Gayner: "He's like a coach. You get the feeling that he wants you to win, that he's on your side."

Investors pay too much attention to the market's short-term peaks, says Athey. "They shouldn't worry about whether the market is up or down this year. They should worry about whether they are saving enough."

Slow and steady wins the race for Athey. "The best path to superior long-term returns is with a patient approach that carefully focuses on the fundamentals. The biggest mistake a value investor can make is to sell winners too quickly," he says. There isn't much chance of that happening with Athey at the helm of Small Cap Value Fund.